The lowest interest rates and the most favorable terms are typically reserved for owner-occupied homes. As the phrase implies, the owner of the home or property lives in the place as their main residence.
When analyzing risks for lending money, lending companies feel that the owner of the place is more likely to work hard and make the payments compared to a tenant or even in the case of a vacation home.
However, this is an obstacle for people or families that wish to purchase a home for their aging parents or physically challenged children. For such situations, Fannie Mae has guidelines that allow such a purchase as an owner-occupied home even though you do not plan on living there.
Known as the family opportunity mortgage to most consumers, really it’s just part of Fannie Mae’s owner-occupied guidelines.
Aging Population Creates Bigger Need
According to Statsta.com, 328.2 million people are living in the USA as of 2019. Of that number, over 28% of the people are aged 65 and above.
That means that we have over 92 million in the country who are beyond the age of retirement. Many of these people will need some type of living assistance as their age increases.
For this reason, many households are looking at various options. Some people use nursing homes and other medical facilities to care for their family, but this can be a very expensive option and is not always the best option.
Others rearrange their home and their schedules to allow the aging relative to move in with them. But this removes some of the independence for the elderly relative and can be stressful for the family.
For these reasons and many more, Fannie Mae and Freddie Mac have expanded the definition of a primary residence to include an individual purchasing a home for their elderly parents or disabled adult child who does not have the income to qualify on their own.
The Basics of The Guidelines
Many Americans are faced with trying to keep their family in a safe living environment. Some turn to rent a property that is nearby and cheap, but most people would prefer their family to own rather than rent. The problem, as mentioned above, comes in the structure of the loan.
When people take out a loan to buy a 2nd home, the down payment requirement is quite large.
Most lenders will ask for at least a 10% down payment, and possibly 20%. Furthermore, the interest rate for a 2nd home will be noticeably higher, especially on a long fixed-term loan.
Also, the premiums for homeowner’s insurance are higher if the property is a 2nd home or a rental property.
By purchasing a family member a home as a primary residence with the parent/child as the occupant, only a 5% down payment is required. For a home priced at $200,000, this can save the buyer $10,000 at the time of purchase in upfront costs.
Lower Down Payments and Rates Save Borrowers Money
The first significant savings for borrowers comes in the form of a down payment.
While a loan for an investment property would normally require between 10% and 20% down payment, these guidelines only ask for a 5% down payment.
On a home priced at $225,000, the difference between a 20% down payment and a 5% down payment is $33,750. For most folks, the program is the difference between renting a place for a loved one vs buying a place for a loved one.
When you combine the low down payment of the loan with the interest rates offered by Fannie Mae for conventional loans, it is clear to see that this type of financing can save the borrower a lot of money over the life of the loan.
Debt-to-Income Ratios can be Higher
Besides the low down payment feature, the debt-to-income ratios available with this program are another big selling point of the loan.
The lending rules for most other loans such as FHA, the VA, or most conventional loans prefer that the borrower’s debt to income ratio is somewhere around 40% to 43%.
What does that mean, in real terms?
It means that the borrower’s loan payment, plus all other existing debt like car payments, credit card bills, student loans, and other unsecured loans cannot represent more than 43% of the monthly gross income.
So, for a borrower that makes a $60,000 annual salary, their average monthly income, before taxes are taken out, is $5,000.
Using a calculator, 43% of $5,000 is $2,150. For this borrower, on a conventional loan or most other types of home loans, the most that they could spend in monthly debt would be $2,150
However, these guidelines allow borrowers to have as much as 50% of their gross monthly income dedicated to debt.
For the same $60,000 borrower, this means that they could have as much as $2,500 in monthly debt payments.
Fannie Mae understands that many households will be making a sacrifice to help purchase a home for an elderly parent or their adult child with special needs. All of this is taken into consideration with the higher ratios allowed on the loan.
Qualifying with these guidelines is exactly the same as qualifying for a conventional loan through Fannie Mae.
This means that the borrower will need a better than average credit score compared to some other home loan options.
It also means the borrower will need to have a very reliable source of income for at least the last 2 years. However, the main borrower does not have to live at the home as their main residence.
The borrower will need to provide documents for their income as well as assets just like with any other loan. Pay stubs, annual W-2 statements, tax returns, investment & retirement account statements will all need to be provided to the lender.
Fannie Mae does have some restrictions about the type of homes that can be purchased.
- The property may not be a timeshare or any type of investment home
- Single unit dwellings are the only homes allowed
- The intended borrower must be the main person in control of the home
- The home needs to be suitable for living year-round
- The owner of the property may not agree to allow a management firm to take over the control or occupancy of the home
Qualifications for Elderly Parents
These are the basic requirements for adults wishing to purchase a home for their elderly parents.
- The elderly parents must either be in a situation where their income is not sufficient to qualify for a loan or they are unable to work.
- The elderly parents must live in the home as their primary residence.
- There is no requirement for where the home is located or the distance between the home of the elderly parent(s) and the home of the adult child.
- The elderly parents are not allowed to be co-borrower on the loan. The adult child will be the borrower.
- The adult child may own a primary residence in addition to applying for the home of their elderly parent.
Could be Cheaper Than Assisted Living
Some households are faced with the possibility of paying for assisted living out of pocket. This can be truly expensive and even inconvenient for many people. With these guidelines, it might be possible to purchase a home for your family member and still afford part-time health care for elderly parents for less than the price of a nursing home.
Each situation is different, and your family will need to weigh the pros and cons of owning a second home versus using an assisted living facility to determine what is best for them.
Qualifications for Disabled Children
These guidelines are also ideal for parents that wish to provide a home for their disabled, adult child. Many people that face life with disabilities hold jobs and contribute to society in meaningful ways. However, their level of income is typically low and does not afford them the chance to buy a home.
Just like the situation mentioned above for elderly parents, the same rules apply to people that wish to buy a home for their grown, disabled child. The parents will be considered the primary borrower and owner of the property even though their child will be the main resident. This allows the disabled child to exert a form of independence and gives the family and parents peace of mind knowing that their child is living in a safe place nearby.
Also, these guidelines are intended only for the child of the borrowers. They cannot be used on any type of investment or vacation home.
Summing Up How To Buy A Home For Your Elderly Parents or Disabled Adult Child
These conventional mortgage guidelines offer a family opportunity for both elderly people and those individuals fighting against a handicap to have a sense of independence while still being close to their loved ones for support.